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Home-buying filter: How do we determine a fair share of equity?
March 30, 2014 2:09 PM   Subscribe

How do you split equity in a new home between friends when one is contributing cash and the other grants?

Asking for a friend:

"I'm co-buying a home in Baltimore City with a friend and will soon draft up a legal ownership agreement. We are trying to work towards 50/50 equity in the house. We each bring something different to the partnership: my friend has access to a $27,000 homeownership incentive grant and I have access to an $11,000 grant plus $10,000 cash-in-hand saved up ($21,000 total). Our combined grants will cover the down payment/closing costs and my extra $10,000 cash-in-hand will go in a joint bank account for home maintenance, improvements, emergencies, etc.

My friend argues that I will have to contribute $6,000 more to match her $27,000 grant and to truly attain 50/50 equity in the home. This means that I will have put $17,000 personal cash towards the home, while my friend put in $0 personal cash.

So here are my questions: Is money received through a grant and cash-in-hand an exact $1:$1 ratio when considering equity? Or, should they be weighted differently? Is my friend's logic sound?"
posted by Dalton to Home & Garden (11 answers total) 2 users marked this as a favorite
 
I imagine you'll get different opinions on this. The bottom line is that both of you need to be satisfied with the arrangement or I suspect there will be hard feelings, if not now, eventually.

My opinion.... Does it matter what the source of the funds are that each of you bring to the deal? Would it matter if the money was from earned income, inheritance, gambling winnings? Would it make any difference...
posted by HuronBob at 2:17 PM on March 30


I believe the logic is sound. 50/50 ownership means contributing the same amount, no matter where the funds come from. You could work out a way to contribute your remaining $6000, possibly considering monthly payments or work in lieu of funds.
posted by raisingsand at 2:18 PM on March 30 [1 favorite]


I think the logic is sound.
posted by deadweightloss at 2:39 PM on March 30


It might help if your friend tries not to think of the money they both bring to the house as 'free grant money', just try to think of ALL the money as cash that they both contribute.

It is unfortunate that your friend can't get as much grant money as your housemate, and therein lies the rub, making it seem unfair for them.

I wonder though, if they will both still qualify for their respective grants if they co-purchase?
posted by NoraCharles at 2:41 PM on March 30


I think there is something to be said for bringing liquid money. I'm a little concerned the other party has no liquid money for the start-up costs (like securing utilities, buying light bulbs etc). Will both of you contribute equal sweat labour, connections (to tradespeople at cheaper rates), experience at homeownership? You both have to feel it is equitable. As future roommates, this is a good test run in how you approach and resolve conflicts and the value you place on each other's contributions.
posted by saucysault at 3:09 PM on March 30 [3 favorites]


What are the terms of the grants? Are there any circumstances under which the grant must be repaid? Does the grant restrict your ability to sell the property or otherwise affect liquidity at all? If so, I would discount her share to compensate for the risk. If not, then money is money.

That said, if you are not 100% comfortable with the arrangement, do not buy a house with this friend. This is probably the largest financial decision you have ever made, and the potential for disaster, both personal and financial, is high.
posted by snickerdoodle at 4:33 PM on March 30 [3 favorites]


Sorry, meant to add that if she wants to disregard your $10k for equity considerations, I would not proceed unless you both put an equal amount in the maintenance account.
posted by snickerdoodle at 4:42 PM on March 30


For some reason, I'm feeling like the grants won't work out this way. But, for the sake of the question, let's assume that two co-owners can bring grants to the table and apply them to the same property. You have to take into consideration grant obligations. Otherwise, these grants are indeed "free money" and the owner with no actual cash outlay doesn't have as much "skin in the game." That's one kind of take.

It's a pretty weird situation and I can see why it's confusing. One's ability to get a grant doesn't seem quite the same as one's ability to save $10k in cash.

If a couple with intermingled finances were to draw up a deal to specify equity in a shared home they might also consider how much of the household income each is earning. What will be the contributions down the road on the house if one party starts making double their income and the other has theirs halved? What's the term on investment? Will they sell in 10 years? Can't they just start with what they have, keep track as they go and then be fair at cash out?
posted by amanda at 9:00 PM on March 30


Is she doing the John Hopkins Grant? Because she needs $1000 cash to access it. Is she counting on your cash to fulfill that obligation? If so, without your cash she has $0, if not why isn't that included in the above figures (is she getting a loan for it, just when she is taking on a huge financial obligation?) Also, the grant money isn't fully "hers" until five years after living in the home, which should discount it as well. It would make sense to do up an agreement on equity based on the restrictions for the grant with her equity being 100% of $27,000 for the first three years, then 50% in the fourth year and 100% of the $27,000 in year (plus any principal payments/repairs she has paid). This grant is complex enough that she should pay proportionately more of the legal fees in drafting up an agreement; an agreement where you both put down cash without third party obligations would be much easier to structure.
posted by saucysault at 4:10 AM on March 31


^oops, mistake made on the math somehow - she has 0% equity of the $27,000 in the first three years, not 100%. You have to live on specific streets - are those streets more expensive/different than what you would be looking at without the restrictions of her grant?
posted by saucysault at 4:18 AM on March 31


I wouldn't do this deal.

You're already having friction, and that's problematic. However, if you insist on doing this, get a real estate attorney, these are not things one guesses about.

An attorney will be able to tell you exactly what to expect and will review all documents for you, so you're not getting ripped off. An attorney can structure the contract for you so that you both are protected.

There are issues like who deducts how much of the mortgage interest on their taxes, and all sorts of other subtleties.

Think, re-think and think again.
posted by Ruthless Bunny at 7:30 AM on March 31 [1 favorite]


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